NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
A portfolio is worth Rs 1,00,000 at the start of Year 1, falls 20% in Year 1 and then rises 25% in Year 2. What is the value at the end of Year 2 and the annualised return over the two years?
The portfolio ends at Rs 1,00,000 with an annualised return of 0%. A 20% fall takes it to Rs 80,000, and a 25% rise on that brings it back to Rs 1,00,000. The arithmetic average of 2.5% overstates the result because returns compound.
- ARs 1,00,000 and 0%Correct
- BRs 1,05,000 and 2.5%
- CRs 1,00,000 and 2.5%
- DRs 95,000 and -2.5%
Explanation
After Year 1: 1,00,000 x 0.80 = 80,000. After Year 2: 80,000 x 1.25 = 1,00,000. Total growth factor is 1.00, so CAGR is 0%. The simple average of -20% and 25% (2.5%) is misleading because returns compound geometrically.
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